Perry's Coal Subsidy Is a Solution in Search of a Problem, Denning Says

says our next guest, Liam Denning. He is our Energy, Mining and Commodities column. This for Bloomberg Gadfly, Liam, a pleasure, Thank you for being here at the Monaco Government Tourism's sustainability focus the luncheon here at Bloomberg World headquarters. Is this really a plan of reform or is it a plan of relief? I mean, I think you have to put quote marks around the words reform and maybe even

plan here that was that was something else? Love it? Okay, go ahead, then back up, and you've got to tell us what is it? What? What? What are the proposals? So ostensibly this is all about keeping the power market quote unquote resilient, and the general thrust of it is

we had the polar bortex a few years ago. Um some gas power plants during that shut down because they couldn't get enough gas because it was being diverted to heat people's homes, and um Rick Perrus sees the pond this to try and institute a subsidy for coal fire power plants which have been struggling, as you may or may not know, And it's being done under this pretense that they basically need to keep a bunch of coal lying around so that if we get an other, uh,

polar ortex, they've got coal on hand to generate power. Now, this is something of a solution in search of a problem, because all sorts of studies and all sorts of companies, including the operator of the regional grid that we're talking about, which covers about seventy million people, have said that this

really isn't a problem. Um And in fact, if you look at what happened in the polar vortex, a lot of coal fired power plants shut down as well because it was too cold for them to to run their systems. So it's really just a cold subsidy. So liam um I love just trying to imagine where you have air quotes as you speak now, and I'm going to be doing that for the rest of the segment. Actually every word, Yeah,

pretty much, you're putting every word into air quotes. Um, the plan calls for for a subsidy for unregulated power plans holding ninety days worth of fuel on site. This talks specifically to the fossil fuel companies, right, who else keeps that kind of sort of physical resources is on hand. I'm just wondering that you know, you you raised an issue. This isn't a conservative principle. In fact, this is somewhat radical.

So if this, if this particular administration adheres to her or says that they adhere to conservative ideas, this kind of flies in the face of that, right, I mean, it's it's not conservative in any form. In fact, I mean it's not conservative on on a couple of fronts. So one is, Um, you're rolling back twenty or thirty years of power market deregulation, which the last I heard conservatives generally favor that sort of thing, you know, markets prices supply and dimand that sort of thing, So you'd

be rolling that back. It's also it's it's just sort of fundamentally intellectually dishonest on a couple of levels. I mean, we're talking about pricing what economists will call an externality. So so this resilience thing apparently isn't captured in power prices. Therefore we need a subsidy. And the energy market is full of all sorts of subsidies, but generally expect conservatives trying to take subsidies out and regulations. So can you

just give us what the defenses of this? I mean before, but just like, what is the argument for why Rick Perry is calling for this, you know, aside from we want to finance core companies. Is it purely the sort of pullar of voritex or is there something else about that that they're saying here? No, I mean it really does rely on this argument that power prices as they are currently set do not reward um certain types of power plant for just being there in case we need them.

And you know, the market operator has said there is there is a problem with the way power is being priced, and we are perhaps setting ourselves up for a problem. However, the market operator has also instituted other market based ways of doing this and has talked about some other things. What they certainly haven't done is said, let's just abandon power pricing altogether and shove a bunch of money towards these qualified power so they can buy more coal, so

it can sit around in a big pile. I've been taking a look at the value of coal stocks. Console energy is just one stock has not sort of grabbed any fabulous attention. I mean, stocks down more than twelve so far this year. So it doesn't look like the coal stocks have gotten a pop from uh, from any of these efforts, right, I mean, okay, right, okay, So let's talk about the political vortex, right from the polar

vortex to the political uh vortex. I was on the impression that the grid needs upgrading and that natural gas is the wave of the future because it's inexpensive and we have a lot of it. Why doesn't the money go to those things? The money is going to those things. So that's precisely why Perry wants a subsidy for cold because everyone should. So the way, well, no gas gas is getting money because it's competing because it's very cheap.

I mean, that's that's why we're seeing gas fired power plants get built and coal fire power plants being retired. The fact is, who at this point is going to invest in a new coal fired plant that won't even begin operation operations for three or four years, by which time the political landscape could be looking different. In general, no one is going to invest that money because these plants run for thirty or forty years, and everyone expects that over time we're going to see things like carbon

pricing or at least tighter regulations on call. I mean, the market is only really going one way. Liam Debting, thank you so much for joining us. Liam Debting is energy mining and commodities calumnist for Bloomberg gad Fly talking about quote Cole, thank you so much for joining us. Well, we're starting to get a sense of how much money US Congress is putting aside to recover from the very

active hurricane season. We're talking about Hurricanes Harvey and Maria and others that have battered the South as well as the Caribbean islands. Here to look at it from the private side is Jonathan Adams, senior insurance industry analyst from Bloomberg Intelligence. Jonathan, thank you so much for joining us. We're starting to get some earnings reports from reinsurance companies.

Excel Group, for example, reported last night, Access Capital reports tonight, Ballads Holding reports tomorrow, and there are others that come next week. Are we getting any greater insight into just how expansive the damages are going to be for reinsurance companies and what the costs will be. Well, the costs are so far largely in line with what had been expected by those companies, so I don't think we're going to see major surprises in terms of the individual company costs.

They do a pretty good job of um estimating and what that is. So for the example for Excel, the net cost was one and a half billion dollars, which is white significant and probably about one and a half percent of the total industry loss. So I think on that score, um the the industry has done pretty well in in estimating what those losses will be for them.

The big question is what to do next? Well, and maybe go go into that because maybe you could describe what happens in a typical cycle after a catastrophe or a hurricane, and what might happen this time that's different. Absolutely, you look at the price increases that were put through after Hurricane Katrina, which is a normal, normal response because you need to recover those losses, and they were upwards of or more for US catastrophe reinsurance UH. This cycle,

it's unlikely to be anywhere near that. And even though UH management teams are talking about double digit increases, those are going to be pretty low double digit increases. And the problem here is that we have an ample supply of capital that is willing to take this risk, and because of that, you simply can't pass on the kind of steep price increases that we're passed on a decade ago with Hurricane Katrina, because there'll be someone else willing to take that risk for less money. And this is

this is super important. I mean, this is a huge issue because if reinsurance companies and others are not able to demand high enough risk premium from investors, from from clients who are taking out these policies, then they're that much more exposed. I mean, does this make the reinsurance company is more fragile going forward because they've got that much lower of a buffer If there are a bigger

than expected number of catastrophes, it could. I don't think we're at a point so far where there's a heightened risk of eating into their capital base. But I do think that there's clearly high risk of those individual companies in that industry having much lower returns, and it could ultimately get to the point that you've indicated where you begin to have a more fragile industry and a more

fragile capital base. At the moment, we do have investors from the capital markets willing to buy catastrophe bonds and that's been a major source of competition for the traditional reinsurance companies, and that's really what has been um driving the influx of capital and what I think will be

a depression on price increases going into eighteen. As we know with how the capital markets act, it certainly could be the case that they pushed that too far, and in fact you do have a more fragile industry sometime in the future. Hey, Hey, Jonathan, wondering if indeed this new capital continues to flow into the insurance industry, You're going to find that a lot of people who have never been in the insurance industry are going to be kept evated by whatever yield is sort of dangled in

front of them. Right. Uh, is there a question, or is there something you would suggest to them newbies in the industry that they need to ask the sponsors or any of the people putting these deals together a question that they should ask before they jump in in an industry they don't know a lot about, absolutely, and that question is, UM, how do you understand volatility? Because it's really um For many bond investors that that are looking at credit, they think they may have a loss, but

there's always some kind of recovery with catastrophe bonds. UH. If you have a full loss, you can go from UH an expectation of receiving all your capital back to getting half of it back or none of it back. And it's really that volatility that should demand a higher return and isn't always getting it because we don't see that volatility year to year. You only see it over a decade or more. So that's the key question, Jonathan, Just real quick, who are these other investors who are

pouring into these this industry? Well, um, it's a broad smattering of UM individuals. They want somewhat higher returns and some diversification, So it could be anywhere from individual hedge funds that understand the insurance market to pension funds that have less of an understanding but certainly want to diversify their UM, their investments UM or other traditional UH fixed income investors. But those two um you know, stand out as as individuals that have been buying this type of asset.

Thanks very much for spending time with us. Jonathan Adams as our senior insurance industry analyst for Bloomberg Intelligence. The bond market at the government by market to sell off at the long end, a little bit of buying at the short end, something that seems to have been going on for quite a while, turning that teeter totter perhaps into a flat board. Here to tell us more. Scott Dorf. He is a Bloomberg Profit and managing director at AMers

Pierrepont Security. Scott, thanks very much for being with us. Thanks for having me. Your latest column is called by

the dip is a losing strategy in the bond market. Why, Well, we've had a situation where the fundamentals for the bond markets have been deteriorating pretty steadily, but we didn't really see that in the prices until starting about a month ago, and ten ure yields actually hit the two oh one level in early September, and I think that was a cathartic stop out for a lot of a lot of traders in particularly speculative investors who you know, had been

betting on higher rates through the summer. Those positions got taken out, and over the last month we've moved up, you know, forty basis points and yields with a pretty consistent and not really significantly changing economic and inflation picture in the UF. Yeah, Scott, thanks so much for joining us today. There are a lot of people saying that we're reaching kind of a sort of moment of truth.

That was what Jeff Gunlock said, a moment of truth for the US Treasury market yields crossing that to two point four percent threshold and just continuing on up. How high can they go at this point with no fundamental change in the backdrop? I mean, yes, the ECB mayn NodD some kind of tapering. Uh, that's more hawkers than people are expecting tomorrow. Yes, potentially inflation could pick up, and yes there could be a more hawkish FED chair. All of that does not negate the trillions of dollars

of cash slashing around the financial system. Well, I think you know, It's probably a bit of a triple whammy in terms of a number of you know, kind of in the background events occurring. I mean, the largest one being you know, the taper and you know the shrinkage of the fet balance sheet, which SET has told this is going to be very much in the background and

we're not going to note us. But I think you know, they protest a little bit too much, and you know, by certainly over two nineteen they're gonna have the Treasury is going to have to find four hundred billion dollars extra that if the paper wasn't occurring, that the SET

would have absorbed. That comes on top of a huge increase in the deficit already this year, where eight you know, we were eighty billion over for this fiscal year, and some of the estimates are that the deficit and the numbers are going to be fifty to higher in terms of what the Treasury has to raise in net new money next year. And that comes at the same time that we have very solid two and a half three

percent growth in the second half of the year. The one outlier has obviously been these core CPI inflation numbers, and I think that is what prevented people from you know, betting too too aggressively on you know, on higher rates. But the set is made it clear they're going to look through that core CPI and they see signs, you know, certainly was an unemployment rate at four and probably headed under four percent next year. They see signs that you know,

inflation is going to be more of a problem ongoing. Okay, So since you think that by the dip is not a strategy, it's going to work with this treasury sell off, Where do you think the tenure yield is heading by a year end? Well, the first target for certainly for the people who look at charts is the year to date highs in the in the two and two sixty two sixty five area. Uh, you know, I don't think that's necessarily, you know, a stopping point. This has not

been been a panicky sell off by any sense. And while the a lot of measures show that the leverage world is extremely short the futures you know, in in the two to five year sector, it doesn't anecdotally, it doesn't feel to me like the a lot of the shorts are you know, are overdone here. So I think it will be more a little bit more of an order continue to be an orderly. It's been a low volume sell off. You know that you have not seen

signs of panic at all yet. Well, well, Scott, you know, just maybe just a little bit more, because if you're saying, all right, yields are going to go higher, despite what we read about inflation, despite what we hear about any effort on the part of the U. S. Treasury to reign in spending, which clearly doesn't seem to be working out. Is there a possibility that there'll just be a lot of buyers who come in because people don't want to take any risk and they want to just match their

future liabilities and they want to hold on to their job. Well, it's you know, with a kurve this flat um. You know, a lot of people view the level of rates in the long end as something of a conundrum that has been supported by massive flows from overseas because their markets are incredibly unattractive yield levels due to quantitative easing. And but we're going to be looking at the end of

that program. There obviously behind the US in terms on the calendar, in terms of removing that access accommodation, but it's coming in tomorrow with the ECB, we should get you know, you know, some clarity there. So you have global central banks in coordination raising rates worldwide, a massively expanding deficit, very solid growth, an incredibly tight labor market. Um. I think that combination will keep the pressure on the back end of the of the treasury market. Yeah, I

can imagine. So going forward, A quick question about John Taylor. Yesterday President Trump asked the Senate if for a show of hands for who they would support as the next FED share nominee. John Taylor was their selection. What would that mean for for bond markets? Well, you know, I think no matter of who we get in there, assuming that we don't get a renomination of Janet Yellen, I think you'll have a more hawk is FED next year.

And you know, the markets are aware that, but I think a lot of people are very unwilling to bet on it given the you know, the randomness of the selection process. Um in Washington, d C. Do you think that you think a show of hands as random? Is that so? But I think that a show of hands won't necessarily affect the decider on the issue. Well, thank you, Scott Dorth, Thank you so much for joining us and

for your insightful columns as always. Scott Dorf is a Bloomberg profit and managing director at amerst pure Pont Securities, also a longtime trader in the bond market. With a lot of insight into what we should be expecting. We

turned now to the world of Apple and smartphones. Alex web, technology reporter for Bloomberg, joins us now from San Francisco, and Alex, I wonder if you could just tell us about the supply chain that it currently exists and how it has changed in order to bring these new iPhones to market. So whenever Apple brings a new phone to market and they have a headline new technology, often that technology, the core of it is not really designed by Apple.

They take components from all over the place, piece them together, and then they say, look at this thing that we've come up with. Well, the technology in the new iPhone ten is written as an x but the iPhone tent is um is actually very similar to what was in the original Microsoft Connect. You know that that censor which

went on top of an xbox and detect movement. What they did was they took that right the way down and made tiny, tiny versions of it just a few millimeters by centimeters across rather than the size of say a small book, and that's been a bit of a challenge for the for the suppliers to really meet those

standards in time for the production. Alex, you know what struck me with the piece that you wrote today which was fascinating, is this tension between Apple wanting to push the envelope and come up with newer and more groundbreaking technologies and the supplier's inability to really mass produce those

at the same level. And I'm just wondering, I mean, is this going to be a pretty big pitfall for Apple as it tries to meet very high expectations from the market about its ability to evolve and to continue to sell its iPhone. So as we've seen, the stock hasn't taken a massive power ending on on this kind of drip drip of news over recent months about the supply chain problems. But because the expectation is that once those supply chain dromas are ironed out, it will feed

into a product cycle of maybe two years. But then comes the question what comes after those two years? How much more can they really innovate and deliver the sort of new technologies which will drive customers to keep buying new phones. There's a widespread fear that the smartphone market is now saturated. This is one of the reasons why Tim Cook, CEO starts talking a lot about augmented reality.

And we've reported that Apple's working on smart glasses, for instance, and those sort of new products are going to be crucial in the it's sort of mid to long term, you know, Alex, I'm wondering if you could tell us about the individual pieces of the supply chain that have been the most problematic for Apple. Is it the three D sensor unit, the one that recognizes your face and unlocks the phone. Yes, absolutely, so there's one particular component

in that. The way this technology works is one of the components Flashy is thirty thousand laser dots onto the user's face and uses that to map it and work out who's who is in front of it and whether

to unlock the phone. Now, that component has a very very small margin of error in the micron range that's a fraction of the breadth of a hair, and so if it's placed slightly awry, the technology doesn't work, and that's created huge problems for the assemblers them the companies who take all these disparate components, piece them together, then ship them to Fox con to to to build into

the phone itself. And these are companies like lg inn Techer Korean Company, and Sharp of course, the Japanese company. In fact, timing with our story today just coincidental. Lg inn a Tech admitted on their call that they've had problems making these modules and that it will affect supply of the iPhone ten come November the third, when it

hits stores. There will be supply constraints. Alex, can you just give us some perspective about how unusual this is for Apple to have supply chain challenges, because you know it hasn't it's not unheard of for Apple. But are the I Phone ten or the challenges here much greater than usual. Yes, basically they are. The It's always the case that Apple has a very effective supply chain management system.

They do not want to have too much supply. They do not want to have millions of iPhones sitting in warehouses around the world getting dusty, so they often constrained supply a little bit means they can create some more appetite amongst the consumers, and also they can tell investors that way, we've sold out of iPhones on first weekend or whatever it might be. So the but in this case it seems not to be something of Apple's own creation.

They are they cannot meet the demand that they had hoped to be able to meet, and that is the sense going into it. Nonetheless, they will be iPhones available next week. It's just that analysts locally in Asia seem to expect it will be between twenty five and thirty million in the whole quarter, rather than perhaps the fifty sixty million which which might typically be expected. Alex, are you going to get in line for your new iPhone? Personally?

I'm not no. I mean it may maybe you can write all that it's my editors tell them to pay me a little bit more. But the the uh, I honestly, I'm not that. I think Touch I D work just fine. I'm gonna say that it's a different kind of three D sensor, the one that gets you the race. I don't have that on my phone, honestly, Alex, I love it. The public appeal for a raise, We're we're all there with you, Alex web. Thank you so much for joining US.

Alex Webb is our technology reporter for Bloomberg News. Coming to uh to, coming to us from our nine sixties studio in San Francisco, and uh this is a little bit different than usual, and it is fascinating and it raises a question to me whether eventually it will create more demand for the iPhone eight, which has had trouble selling because people realize they're not going to get their iPhone ten so quickly. Right now, let's see you online. Let's see you online for this. Thanks for listening to

the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox, I'm on Twitter at pim Fox, I'm on it, or at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.